AT&T is spinning out its video operation in the United States. It is establishing a new business under the DIRECTV name to own and operate the existing DIRECTV satellite, U-verse fibre and AT&T TV online services. AT&T will continue to own 70% of the business, with TPG Capital taking 30% for $1.8 billion. Subject to closing the transaction, AT&T will receive $7.8 billion, which it will use to reduce its debt. The deal implies an enterprise value for the company of $16.25 billion. That is a substantial discount on the $48.5 billion AT&T paid for DIRECTV in 2015, or about $67.1 billion including assumed debt.

“As the pay-TV industry continues to evolve, forming a new entity with TPG to operate the US video business separately provides the flexibility and dedicated management focus needed to continue meeting the needs of a high-quality customer base and managing the business for profitability,” said John Stankey, the chief executive of AT&T.

In divesting the television units, AT&T says it is focussing on strategic businesses that are key to growing customer relationships across 5G wireless, fibre and HBO Max.

“Video remains a core service for tens of millions of households,” said David Trujillo, a partner at the buyout firm TPG. “Since its launch in 1994, DIRECTV has continually evolved its product, content and service to provide customers an industry-leading video offering. As video consumption habits evolve, the new DIRECTV will continue investing in its offering to provide value to its customers, including through next-generation streaming pay-TV services.”

John Flynn of TPG said: “We are particularly excited by the opportunity to grow new DIRECTV’s streaming video service, leveraging the company’s leading pay-TV platform, talented labour force and large subscriber base to transition it into a leading next-generation video provider with best-in-class content and customer experience.”

Under the deal, AT&T will be able to offer the television service to its customers and the new DIRECTV will be able to offer access to the HBO Max online video service.

AT&T acquired DIRECTV in 2015 for $48.5 billion. Including assumed debt, the total purchase price was about $67.1 billion.

As chief strategy officer for AT&T at the time, John Stankey advised on the acquisition of DIRECTV and went on to lead the business unit, which became the entertainment group.

“We certainly didn’t expect this outcome when we closed the DIRECTV transaction in 2015, but it’s the right decision to move the business forward consistent with the current realities of the market and our strategy,” he told analysts. “The deal provides us an opportunity to monetize a portion of our US video assets, participate in future cash distribution from the entity and share in future value creation opportunities.’

AT&T notes that since it closed the acquisition of DIRECTV, the business has generated cash flows of more than $4 billion a year and it expects this to continue in 2021.

At the end of 2015, DIRECTV had 19.78 million television subscribers in the United States. It reached a peak of 21.01 million at the end of of 2016 but bled subscribers thereafter.

Since the start of 2017, AT&T has reported consolidated numbers for its Premium TV customers, including DIRECTV and U-Verse. In March 2017 it had 25.03 million. At the end of 2020, after a run of 15 consecutive quarterly losses, that had reduced by over a third to 16.05 million, plus 656,000 online subscribers.

ATT Premium TV 2018-2020 Q4. Source: informitv Multiscreen Index.

For the full year of 2020, the video division had revenues of more than $28 billion, with an operating income of $1.7 billion and earnings before interest and tax of $4 billion.

AT&T says that services to customers will remain unaffected on completion of the transaction. Staff that support video operations in the United States will transition to the new DIRECTV company.

The deal does not include the HBO Max online video service, U-verse network assets, regional sports networks, the AT&T video services in Latin America, now branded Vrio, or the AT&T equity stake in Sky Mexico.

The transaction is subject to regulatory review. Once it closes, AT&T intends to deconsolidate the video operations in the United States from its results.

In the longer term, a combination of DIRECTV with DISH Network remains a possibility. Dish Network chairman Charlie Ergen has previously described this as “inevitable”.